An oil giant’s road from Rajasthan to ruin

FROM OUR AUGUST 2004 SHELL NEWS ARCHIVE…

“Shell, by contrast, has endured the most humiliating, torrid and damaging period in its 100-year history. It is hard to think of a more spectacular fall from grace or a more abject example of management failure.”: “The deeper it dug itself into this hole, the more Shell was forced to lie”

Fortunes; Failure; Scramble

14 August 2004

It is a long way from the arid deserts of Rajasthan to the Shell Centre on London’s South Bank. But two events this week provide a link.

One was the announcement by Cairn Energy that it had made yet another significant oil discovery in a region of India hitherto better known for its sumptuous pink palaces and backpacking tourists. The other was the disclosure that Shell’s former head of exploration and production, Walter van de Vijver, is to receive a £2.5m pay-off after being sacked for his part in the company’s reserves scandal.

The link is this: the oil fields in India where Cairn has struck black gold were sold to it at a knockdown price by Shell. Cairn was a small independent exploration company when it paid Shell £6m for the exploration block in Rajasthan two years ago. It is not so small any longer. Since Cairn made its breakthrough discovery in the region in January this year, its stock market value has risen by 275 per cent or £1.7bn. Not a bad return on investment.

Fortunes

By a coincidence of timing, Cairn’s first Rajasthan discovery was announced just 10 days after Shell had shocked the oil and financial markets by slashing its proved reserves by 3.9 billion barrels or a fifth.

Since then, the fortunes of the two companies could not have diverged further. Cairn is now valued at slightly less than £2.4bn, putting it on course to join Shell in the blue-chip FTSE100 index. Shell, by contrast, has endured the most humiliating, torrid and damaging period in its 100-year history. It is hard to think of a more spectacular fall from grace or a more abject example of management failure. Its three most senior executives have been fired and it is or has been under investigation by five different regulatory bodies on either side of the Atlantic.

So far it has paid £83m in fines but it faces unquantifiable claims for damages in the civil courts from aggrieved investors. It is now poised to give in to shareholder demands and abolish its historic dual-board structure and perhaps even merge its British and Dutch halves altogether.

But the links between Shell and Cairn go deeper than just the fact that one company sold the other an exploration block in some far-flung part of the world. In many ways, Shell finds itself in its current predicament precisely because of decisions like the one to quit Rajasthan.

For a great many years, Shell has had a very poor record of finding new sources of oil and gas in comparison with its rivals such as BP and Exxon-Mobil. It is that which is the root cause of the scandal that has now enveloped the company.

Shell’s innate conservatism – it is not known as the civil service of the oil industry for nothing – meant that it always felt safer pumping production from mature, established fields and thereby keeping the dividend gusher turned on rather than exploring for oil in high-risk, but high-reward, parts of the world.

Curious really, considering that the one thing an oil major such as Shell can afford to do is take risks. Unlike small independent exploration companies, it is not betting the farm each time it sinks the drill bit. Shell’s risk averse approach is perfectly illustrated by its decision to get shot of Rajasthan, a region which, on the face of it, was not the most promising territory for exploration but had bags of potential for anyone who was brave enough.

Failure

Initially, cairn must have thought that it had been sold a pup because it spent the best part of two years sinking holes in the ground and using up investors’ money without a single success. It was only when it tried its luck 50 miles further north that it finally struck gold. Cairn’s gamble is matched only by Shell’s conservatism. But in the oil industry, it does not pay to be too cautious. For Shell, it has resulted in a reserves-replacement ratio which is vastly inferior to those of its rivals.

Replacement ratios – the rate at which production is replenished each year by new discoveries – are an important yardstick by which markets value oil companies because the volume of reserves they have under the ground is an important measure of their future worth. Most oil companies regard a replacement ratio of anything less than 100 per cent as failure. At Shell, it was consistently well below that level.

Scramble

This meant that every year, just before the filing of its regulatory accounts, there was an unseemly scramble to book as proven every barrel of oil it could lay its hands on. In the words of one former Shell executive: “We told all the operating companies to look in the cupboard and see what they could find.”

As is now painfully clear, some of Shell’s operating companies joined the search a little too enthusiastically. In some cases, reserves were booked as proven when at best they were probable – an important distinction as far as investors and financial regulators are concerned because it indicates the likelihood of recovery. In other cases Shell chose to book reserves in jointly owned fields even though its partners felt they were not able to do the same. The deeper it dug itself into this hole, the more Shell was forced to lie to cover the tracks leading up.

Shell is now paying dearly for that odd combination of ingrained conservatism on the one hand and gung-ho, purblind optimism on the other. The extent to which Shell’s arcane corporate structure and lack of accountability or clear lines of communication perpetuated an environment in which such misjudgements could occur has been argued over long and hard.

Shell insists the two are not connected but the fact that it is now about to tear up its structure and start again suggests otherwise.

Momentous and traumatic as that process promises to be, in some ways it will be the easy bit. The harder part will be to change the mindset and culture which has permeated Shell for longer than anyone can remember. More than that, it will have to develop a new business model which puts much greater emphasis on riskier, frontier exploration. The payback should be a business with better quality reserves.

In the short term, Shell’s replacement ratios are likely to be flattered. The perverse effect of the massive recategorisation of reserves that the company has been forced to make is that over the next few years, its replacement ratio will improve markedly as those reserves are moved back again from the probable into the proven category.

But that is unlikely to fool anybody. Shell’s investors will demand hard evidence that the leopard really has changed its spots. After the destruction of trust and value presided over by Shell, that promises to be a much longer journey, even than Rajasthan to the South Bank.

SHELL BLOG

Comments

Bonus Group: It is understandable that a niche now exists in the market for a company similar to BG Group, but for Neptune Energy to set its aim at emulating and becoming like BG is nothing short of horrifying. Why anyone should wish to recreate the inept management, twisted HR policies and rancid technical half truths of BG Group in order to deceive the shareholders is beyond comprehension. If they do, then the Serious Fraud Office should be on the alert. Sammy 'two pools', whose past remit included selling Enterprise Oil to Shell, rather than ENI is made of sterner stuff. That said, his nuclear ambitions did fall somewhat short of those of Kim Yong Un. Let's wish Neptune Energy a long, scandal free future and greater integrity than bungling BG with its House of Cards and flamboyant ineptitude.

Bogus Group: Following the acquisition of Engie the Financial Times headline “Neptune Energy sets aim on being the next BG Group” may have sent a chill through some. To think there could possibly be a rise from the ashes is an alarming prospect
However there was some comfort in the company chairman statement “We have the opportunity to take the time to get it right”.
Hopefully this means their Ethics and Compliance foundation will actually be more than just another policy open to distortion by misconduct.

Bill Campbell: Is the New York City case against Oil Companies justifiable or just hot air?

Many, if not all prestigious US scientific journals estimate largest source of air pollution in US is caused by vehicle emissions. Current estimates that US has some 260 million automobiles and 11 million trucks. It is the daily emissions from these vehicles that are the cause of scientific concern. But anybody visiting Florida, and following a construction truck, will be familiar with black smoke in copious amounts emitting from the vertical exhaust pipe, sometimes it's so bad it can restrict your vision but Florida is not the only state of the US that does not require emission control, there are many more, monitoring for example (like a UK vehicle MOT) is not legally required or carried out.

So perhaps De Blasio should start suing these delinquent states.

In any case, I find the whole matter ludicrous in a country, where their President claims that human activity is not related in any way to global warming and appoints a head of EPA who is also so inclined (a man described by NY Times as an arsonist in the Fire Station) so why does Shell et all not call as witnesses in their defence the current EPA Director, or otherwise why does De Blasio not start by suing those states that allow millions of vehicles to pollute the atmosphere daily.
Bill

Bonus Group: Further to my last post on this blog. Sound Energy have now arranged a slap-up bean feast for their shareholders to be held on 15th February at Grace Hall, Leadenhall Street, London. Drinks at Carriages afterwards. Dress is formal so don't expect too energetic a food fight. Attendees must pay for their own tickets! All will be revealed about the new Coro strategy. You may recall that Sound shareholders will receive Coro shares as a result of the divestment of Sound's Italian assets. The question is whether Sound shareholders will end up in the soup.

Bonus Group: There are rumblings in the ether about Rockhopper Exploration plc having failed to perform Due Diligence with integrity in respect of their purchase of the Italian focused company Mediterranean Oil and Gas (MOG) in 2014, and in particular MOG's asset, the Ombrina Mare oil field.
Following the decision in February 2016 by the Ministry of Economic Development not to award the company a production concession covering the Ombrina Mare field, the company has considered its legal options with regard to obtaining damages and compensation from the Republic of Italy for breaching the Energy Charter Treaty (ECT).
Could this have anything to do with the sudden and unexpected departure of Rockhopper's Chief Operating Officer, one 'Good Time' Fiona MacAuley? Fiona, a Chartered Geologist, started her career with Mobil North Sea Limited in 1985 and has subsequently held key roles in a number of leading oil and gas firms across large mid and small cap E&Ps including BG and Hess.
Fiona is now Chief Executive Officer of Echo Energy plc where Stephen Whyte (also ex BG) is a Non-Executive Director, previously having been Chairman of Sound Energy. Fiona will also become a Non-Executive Director of Saffron Energy plc. It is proposed that Saffron acquires Sound Energy's portfolio of Italian interests and permits through the acquisition by Saffron of Sound Energy Holdings Italy Limited (SEHIL). SEHIL holds all of Sound Energy's Italian oil and gas interests through its own wholly owned subsidiary, Apennine Energy SpA (APN). It is proposed that Saffron will be renamed Coro Energy plc.
This is yet another 'reverse takeover' by the Sound Energy/Echo Energy Team. The share options for the directors are raining on them like confetti. Could there be bonuses in store for the Directors of this association of companies where the paint is never allowed to dry?
Plenty of 'smoke and mirrors' and wool being pulled over the shareholders' eyes in this can of worms.

Bogus Group: No doubt Chevron and partner Serica Energy will have their legal and commercial teams in action. Production on the partner owned Erskine platform has been shut down due to a blockage in the Chrysaor operated Lomond - Everest pipeline export route. Chrysaor purchased the assets from Shell who in turn inherited from BG Group.
Déjà vu springs to mind, as the Chevron partnership’s revenue was affected two years ago, due to a blockage in the same pipeline when BG Group was the operator.
The well-touted “lessons learned” jargon, will no doubt be on the lips of these companies executives as they scurry to apportion blame.
In a previous post Bonus Group stated “BG shrapnel has fragmented in the direction of Tailwind Energy”
This appears to be a similar story as other BG shrapnel (both operations and legal) moved to Chrysaor via the Shell route.
I’m sure the Chrysaor mob will feel comfortable dealing with the legal and commercial issues experienced with BG Group (later Shell), as it will be the same rhetoric for the causal factors. However Chevron and Serica may want to dig a bit deeper into the previous incident, to see how BG Group dealt with this, the transparency of reporting and who was made accountable.

Ornithologist: If it walks like a duck, quacks like a duck, it may well turn out not to be a penguin!

Bonus Group: BG shrapnel has fragmented in the direction of Tailwind Energy (aka Tailspin Energy!). Much hot air from after-burn can be expected from this company - mercurial bunch. In December they announced the acquisition of Shell Expro's interests in Triton Cluster, located in the UK Central North Sea 190km east of Aberdeen. Their stated intention is to further develop the asset. Probably through a three pronged approach: bonus, bonus and more bonus! Will Triton turn-out to be a flounder?

Bill Campbell: End of ammunition supply!
Not sure what the ammunition comment means, are you being positive or negative. If Shell keep supplying the ammo well this website is under no obligation not to use it surely. We would all like the ammo to dry up. It would be pleasant to see the most corrupt organisation in Europe turn the corner, and for example demonstrate daily openness,honesty and integrity instead of serial lies. When I say it's a corrupt organisation I do not infer this characteristic on the worker bees, but it is clearly corrupt from the top to the top, that is in its boardroom, including the non-executives who tend to know what goes on but sit on their hands, anything for an easy life. Highly paid window dressing.

Ammunition: Mr Donovan, Shell seems to have provided you with a huge amount of ammunition over the years. Is there any end in sight?

Royal Dutch and The Law: Hello website, can I suggest that if the Dutch and Itailian Prosecution services are not aware of the Shell /police authority "happenings" in Eire, that they should be and quickly.

Shell Corrib Corruption: Mr D I make the reference of a link with police heroin dealing inquiry on this fact Athlone police station ( Heroin hub ) was the chosen destination for the balance of the Shell alcohol consignment on the instruction of Garda Sub Aqua SUPREMO Liam Grimes so that's drugs and alcohol meeting in the same police station "of all the police stations in all the world you had to walk into mine "...is there a " link. "Time will tell ...we recognise that 99 out of 100 Irish police personnel are amongst the finest in Europe....however ....

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